Quantified Upside Momentum: 5-Day Streak

Depending on what time you opened up your terminal today the top article in mainstream financial news was either the jobs number or market’s current winning streak.

google-finance-top-october-22-2013

The employment situation has moving parts which are difficult to quantify and complicated to analyze. There are structural issues, and the main variable is how the Fed reacts to the changing data. We don’t feel there is a huge edge in guessing what the Federal Reserve board might do. Besides, the market is discounting the most likely outcome already. Who are we to argue?

But we are in a winning streak and rising asset prices are infecting the mood of everyone who opens up their broker account. Since rising market are a key driver of sentiment, and momentum streaks are relatively easy to quantify, we will analyze this phenomenon to gain some insight into how events might play out. Is sentiment extreme and ready to create a reversal, or are we just getting started?

The vertical area shaded in blue matches the 5-day winning streak, and the grey represents 20-days after.

 

spy-winning-streak-5-days-oct-21-2013

What we want to know is whether the trend is likely to continue or not. First thing we can look at is the statistics table:

spy-winning-streak-5-days-oct-21-2013-stats

The statistics table tells us that momentum usually keeps going. Over 20-days, you end up with a winner 64% of the time. That’s a little bit dry for me.

I’m interested in how the trade plays out over the 20-days. For that, I need the Alpha Curves.

spy-winning-streak-5-days-oct-21-2013-alpha-curves

The Alpha Curves allow you to do a “snap” analysis. In a single glance, you should able to identify the risks and rewards in the trade. The four Curves together represent the most dominant patterns our algorithm can detect based on our parameters. We observe them individually as potential narratives unfolding to changing conditions and also as a whole to see where the overlap in price action occurs.

Pattern 1 (most dominant): Momentum carries us thru for nearly another month.

Pattern 2 (second most dominant): Momentum carries thru for a few more days and then we experience a significant reversal.

Pattern 3 (third most dominant): Some volatility as we brush up against resistance and then a push to higher prices (which turns out to be a head fake).

Pattern 4 (fourth most dominant): Consolidation and then resumption of rally.

The overlapping patterns I see is for at least minor follow-on momentum for a few days before the patterns diverge. We may be overbought now, but in each of these instances we were also at varying degrees of overbought conditions.


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